A one-day CalPERS event for new money managers, who want a chance to invest public pension funds, drew an overflow crowd this month, packing nearly 400 into a Sacramento hotel conference room with another 100 on a waiting list.
Public pension systems, with some prodding from legislation, are stepping up a drive to spread their investments to firms owned and operated by minorities and women, often with what were called “mixed” returns so far.
Joining CalPERS at the “Emerging and Diverse Manager Forum” were panelists from the California State Teachers Retirement System, the two Los Angeles city systems and the San Joaquin County Employees Retirement System.
The definition of “emerging and diverse” is loose, usually meaning new and small (managing less than $2 billion) but often varying widely among different investments such as stocks, bonds, private equity, real estate, infrastructure and commodities.
Under legislation requiring the California Public Employees Retirement System and CalSTRS to have a five-year plan for emerging manager participation in all asset classes, the definition of “emerging investment manager” was left to the pension systems.
Both systems already had some emerging manager programs, going back 20 years at CalPERS and since 2003 at CalSTRS. The first annual emerging manager progress report required by the legislation was issued by each of the two systems last month.
One reason for the loose definition of emerging manager is Proposition 209 in 1996, which prohibits state agencies from discriminating or giving preference based on race, sex, color, ethnicity or national origin.
The CalSTRS report said SB 294 in 2011 by former state Sen. Curren Price, D-Los Angeles, “has multiple requirements in the utilization of emerging managers, the majority of whom are people of color due to the changing demographics in the country.”
The legislation is a requirement only because the pension systems agree to comply. After a “raid” on CalPERS by former Gov. Pete Wilson, the union-backed Proposition 162 in 1992 gave public pensions sole control of their investments.
By giving money to managers with a limited track record, the pension funds risk more criticism about whether their investment earnings forecasts are too optimistic, concealing massive debt that will eat up government budgets.
As a long-term investor, CalPERS cites three financial reasons for using emerging managers: early identification of strong potential to succeed, unique opportunities that might otherwise be overlooked, and cultivating the next generation of talent.
The CalSTRS chief investment officer, Chris Ailman, ranked third last year in Asset International CIO magazine’s “Power 100,” told the forum the 2008 financial crisis reflects a “New York-centric” over-concentration of “white males” like himself.
“We want our managers to be diverse, have different backgrounds and manage money from lots of different places,” he said.
Ailman said CalSTRS, where 72 percent of the members are female, has a special focus on women-owned firms as it pursues diversity in investment management and on corporate boards.
The two big pension systems want wide-ranging diversity among their employees. Anne Stausboll, the CalPERS chief executive officer, told the forum the CalPERS workforce is as diverse as the state.
“A state that, according to a report from the governor’s office just last month, saw Latinos become the largest ethnic group in California, a state with significant Asian- and African-American populations that will continue to grow at nearly 5 percent annually over the next five years,” she said.
CalPERS has 400 emerging and diverse managers who oversee or are involved in some way with $12 billion in assets, the forum was told, a relatively small part of a total portfolio valued at $288 billion last week.
“Women make up the majority of diverse managers, with Asian American, African American and Hispanic American classifications following in declining order,” said the first CalPERS report required by the legislation.
A survey of emerging manager direct relationships and fund-of-fund advisors found that 12 Hispanic-American managers have $291 million in CalPERS assets, most of them pursuing private equity strategies such as leveraged buyouts.
Women-owned managers (65) had most of the CalPERS emerging and diverse assets, $5.9 billion, including some classified as minority owned. Asian-American managers (32) had $2.2 billion. African-American managers (13) had $1.3 billion.
“Performance of emerging managers varies, and based on CalPERS experience, we cannot draw a broad conclusion about performance of emerging managers,” said the report.
The CalPERS interim chief investment officer, Ted Eliopoulos, told the forum that a “deep dive” into the three asset classes with the most CalPERS emerging manager money (private equity, real estate and global equity) found a wide range of results.
“Some extraordinarily terrific results,” he said, “as well as some really, I guess the politically correct way to say not so good, is really terrible results.”
Ailman said of CalSTRS results: “I think our experience has been mixed. It’s hit or miss. Sometimes it has added lots of of value in certain asset classes and in other asset classes we have had more variable returns.”
Most of the CalPERS emerging manager money, $7 billion, is in private equity, a lucrative asset class some call a rebranding of leveraged buyouts that has spawned a new group of billionaires.The manager can receive a share of profits at a low tax rate.
An update of the emerging manager private equity given to the CalPERS board last month said that as of last June 30 private equity emerging managers have since inception returned 9.58 percent, compared to 11.26 percent for non-emerging managers.
The CalSTRS private equity class returned 19.2 percent last year, compared to 7.9 percent from the $1 billion emerging manager Proactive Private Equity portfolio, said the CalSTRS annual report issued last month.
A Cambridge Associates review of the CalPERS private equity emerging manager program presented to the board last month said the maturing private equity industry is increasingly competitive and challenging.
“No ‘secret sauce’ alone can explain the success or failure of emerging managers,” said the Cambridge study.
A Callan Associates benchmark survey of large pension funds commissioned by CalPERS (seven of 11 responded) found that the CalPERS percentage of externally managed assets given to emerging assets is well above average.
The survey also found that six of the seven pension funds plan to expand the use of emerging managers, hiring additional emerging managers in the asset classes where they already have them.
Ron Peyton of Callan told the forum the expansion plans mean “the sponsors are happy with emerging manager programs and that you, emerging managers, have been successful. So keep it up.”
Originally posted at CalPensions.